Gold After Powell: More Drab or Shine?

Powell’s comments will come in the wake of Tuesday’s data showing groundbreaking U.S. single-family home-building projects up their most in more than three decades in May. Permits for future construction also climbed, suggesting that the housing market was turning a corner despite getting clobbered by Fed’s rate hikes.

Mark Luschini, chief investment strategist at Janney Montgomery Scott, said the bullish housing starts may complicate the "formula around what the Federal Reserve is going to have to do in order to tame inflation."

From Powell, markets will, particularly, be looking for new guidance on the path of interest rates as inflation remains well above the Fed’s target of 2% annually and the labor market remains tight by historical standards. To be sure, Powell had acknowledged those themes a week ago at the central bank’s post-rate decision news conference.

So, what could he say today and tomorrow? And how will the dollar and gold react?

Hawkish Powell/h2

The main takeaway for markets from last week was a Fed dead set on getting inflation back to its cherished 2% target and resuming rate hikes, if necessary, in July and later in the year to achieve that.

The US Consumer Price Index, the broadest gauge for US inflation, grew by 4% in the year to May, expanding at its slowest pace in more than two years. The Personal Consumption Expenditures Index, the Fed’s preferred inflation gauge, meanwhile, grew by 4.4% in the year to April.

Both are at least way above the Fed’s long-term target for inflation.

Conditions that permit more amenable inflation in the United States “are coming into place,” Powell said last week, adding:

“That would be growth meaningfully below trend. It would be a labor market that's loosening. But the process of that working on inflation is going to take some time.”

The labor market is the juggernaut of the US economy, adding hundreds of thousands of jobs a month over the past three years after initially losing 20 million to the COVID-19 pandemic.

While policymakers the world over typically celebrate on seeing good jobs numbers, the Fed is in a different predicament. The central bank wishes to see an easing of conditions that are a little “too good” now for the economy’s own good — in this case, unemployment at more than 50-year lows and average monthly wages that have grown without stop since March 2021.

Such job security and earnings have cushioned many Americans from the worst price pressures since the 1980s and encouraged them to continue spending, further feeding inflation.

The Fed has a mandate of ensuring “maximum employment” through a jobless rate of 4% or below, and keeping inflation “manageable.” The last was a task easily achieved before the COVID-19 breakout, when prices expanded less than 2% a year. The pandemic and the trillions of dollars of relief spending by the government, however, triggered runaway inflation since mid-2021.

Powell said the Fed’s policymakers were almost unanimous that more rate hikes may be needed to keep a handle on inflation.

“Nearly all participants think further rate changes will be necessary,” he said, referring to members of the FOMC.

For a guide, he said:

“We want to do … minimum damage we can to the economy. Of course it's great to see wage increases, particularly for people at the lower end of the income spectrum. But inflation hurts those same people more than anyone else. People on a fixed income are hurt the worst and fastest by high inflation. Getting inflation back down to 2% … benefits everyone.”

If Powell sticks to this narrative, expect the Dollar Index to maintain stability at above the 100-week SMA, or Simple Moving Average, of 101.40, says Sunil Kumar Dixit, chief technical strategist at SKCharting.com. He adds:

“A hawkish Powell is likely to send the Dollar Index higher towards the Weekly Middle Bollinger Band of 102.88, above which, the 50-week EMA, or Exponential Moving Average, of 103.35 may be challenged.”

Ahead of Wednesday’s regular New York trading session, the Dollar Index was at 102.188 by 01:35 ET (05:35 GMT), up 0.06%.

In the case of gold, the spot contract, which hovered at around $1,936.50 at the time of writing, practically flat from Tuesday’s session, could go to $1,910, cautioned Dixit.

“A hawkish Powell is likely to strengthen the Dollar Index and keep the thumb on gold, creating bearish pressure that could move it below the next critical zone targeting the swing low of $1,924 and exposing next leg lower towards the 61.8% Fibonacci level of $1,910,” Dixit said.

In the short-term, gold was already looking bearish with Tuesday’s renewed bear attack on the 50% Fibonacci level of $1,942, marking the 100-day SMA of retracement measured from $1,804 to $2,081.

“If the Dollar Index continues to advance on a bullish path, gold bears can push deeper into the major support zone of $1,890-$1,850 which is a value zone for long term buyers.”

Dovish Powell/h2

“As we watch, we'll see what's happening,” Powell told reporters after the central bank’s policy-making Federal Open Market Committee, or FOMC, decided at its June 14th meeting to hold key lending rates at a peak of 5.25%.

“We have responsibility for financial stability as well, and that is a factor that we're always going to be considering,” Powell said, referring to market fears that the FOMC may have overdone rate hikes with a 500-basis point increase from a pandemic-era standing of just 25 basis points.

These are just the kind comments that veer to the dovish side of the Fed chief and signal that come July 26, the central bank may be ready to kick the can further down the road for a rate decision.

A dovish Powell may weaken Dollar Index, sending it below the 100-week SMA of 101.40 to approach the horizontal support base formed at 100.50, Dixit said.

This zone can attract buyers to resume an uptrend in gold, to at least above $1,950 over an extended timeframe, Dixit said, adding:

“A dovish stance by Powell is likely to weaken the Dollar Index, supporting gold’s rebound above the 50-Day EMA of $1,962 and extending recovery towards the 1975-1978 zone.”

As much as the average gold bull would want a prompt return to $2,000 highs, Dixit said it was critical to acknowledge the short-term bearish trend that has engulfed the yellow metal of late, adding:

“With recent day closing hitting below the 100-day SMA of $1,942 and bias developing more towards $1,910 looking more likely than ever, we assume that any rebound from the lows will be limited to the $1,975-$1,978 critical barrier. Only after a day/week closing above this zone will gold be comfortably back on the bullish path, aiming for highs of $2,006-$2,015.”

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Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.